Question

3. Analysis of an expansion project Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Garida Co.: Garida Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Unit sales Sales price Variable cost per unit Fixed operating costs Year 1 3,000 $17.25 $8.88 $12,500 Year 2 3,250 $17.33 $8.92 $13,000 Year 3 3,300 $17.45 $9.03 $13,220 Year 4 3,400 $18.24 $9.06 $13,250 This project will require an investment of $15,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project's four-year life. Garida pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be under the new tax law. Determine what the project's net present value (NPV) would be under the new tax law.
First drop down options:

$28,620

$25,317

$20,914

$22,015

Second drop down options:

Bonus

Straight-line

Answer 1

Dear Student Please refer working notes for details

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Analysis of expansion peqject of Glasida 60. º Working Notes 8.88 9.06 9.18 Particulcers Year Year 1 year 2 Years Year 4 A. Unit Sales - 3000 3250 3300 3400 (Amt in '$ B. sales price 17.25 17.33 17.45 18.24 C. V. cost pille - 8.92 9.03 De contribution piye 8.37 8.4) 8.42 CB-C) 6. Total cowbibution- 25110 2 7332.50 27786 31212 CAXD) E fixed operating cost- 12500 13000 13220 13250 G. Profit before Dep. - 12610 14332.50 14566 17960 u tax (E-F) - cese 9£ dep. allowed 100% at tao H. Dep. & 15000 Nil Mil Mid Nid I. PBT (6-1) (15000) 12610 14332.50 14.566 17960 J. Tax @25% (3710) 3152.50_ 3583.12 3641.50 4490 K. PAT (I-I) (18250) 9457.50 10749.38 10924.5 13470 Add! Dep. 15000 cash flow after tax £3750 9457.50 10749.38 10924.50 13470 DOT / Care2 of dep allowed on sLm basis L. Dep. Mid 3750 M. PBT (G-L) Nil 8860 N. Ree Tex @ 25% Mit 2211 O. PATCM-N) Nid 6645 Add! Dep. (L) Nid 3750 lash flow aftertex Mil 10395 3750 10582.50 2645.62 7936.88 3750 401811686.88 3750 3750 Most 14210 2704 3552.50 8112 10657.50 3710 3750 11862 14407.50

9 Profett Project NPV under New teex law (see working note Case 1 13 in Golden yolcott (Amt in $) in (CI-20 Yeas cash out flow cash Intlow Met cash Inflow PVA@4% PV o 15ooo) 3750 (11250) _ L (1/250) 9457.50 9457.50 7 0,900 - 8511.75 10749.38 210749.38 0.811 8717.75 10924.50 .010924.50 0.73 7985.81 13470 TAS 13470 0.659 8876.73 NPV 22842.04 - Thus the eight answer is $22858 in ANT my difference for the because of approximation tant unina ha disenang time Ub) NPV using SLM deb (see working notes Case 2) IS Year o C.D. 15ooo ( I - 10395 11686.88 11862 1440750 N.c.1. (15000) 10395 11686.88 11862 14407.50 - PUF@ 1% PV 1 (15000) 0900 93JJ. Jo 0 .811 94 78.06 0.73) 8671.12 0.659 9494.J4 NPV 21,999.22 Thus, the right answer is $22,015 difference is due approximation (0) method Using the 10% depono Bonus will result in highest NPV depreciation for the project

(d) - vor solant rauninna Lotto Call of Garida reduce of NPV if one of it's division's not after tax cashflow reduced by $400 eat for 4 years Tea m loss of cash flow pes year X PVAF (1%, 4 yeas) 1515? _ $400 x 3.102 19.2°E D E $1240.8 Z-SP DF280AO . e. $1241 Opel 2012 (e) The right answer is zi - The company does not need to do anything with the cost of marketing study because the marketing CORD study is a Sunk Lost, n 2 n on vou (dr -